No Retarding Alexium's Flame

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Alexium is the first company to provide an FR coating solution to the Pentagon that can allow low-cost, environmentally-friendly, durable 50/50 NYCO to displace vastly more expensive inherently FR fabrics in the four major military branches.

Shareholders have been waiting a long time for materials technology company Alexium International (AJX) to sign deals and start earning revenue, but they would have to be happy with the progress made in 2015.

The developer of fire-retardant material has kicked some big goals and is on the verge of cracking a potential worldwide market for its products.

Alexium’s goal is to clothe militaries and emergency services workers with clothing made mostly from nylon treated with patented technology developed by the US Department of Defence.

In January the company announced its first significant commercial-sector account, with an unnamed customer, for indicative annual revenue of US$1 million–$1.5 million. The customer – known to be a global leader in the home furnishings market – is using Alexium’s Alexiflam technology in a back-coating application for the decorative fabrics and contract market. Alexium had thought its best chance for commercialising Alexiflam was in the transport industry, so this came as a pleasant surprise. Full commercial scale-up of this product was achieved in May, and follow-up orders came through in July. Full-scale production and consumer roll-out is expected to occur by the end of the year.

That announcement was followed in February by an agreement with a major outdoor tent manufacturer to use Alexiflam in water-proof, fire-retardant tents made in Asia for the US market. In the same month, Alexium delivered the first environmentally friendly FR nylon-cotton fabrics to the US Army’s Natick Soldier Systems Center, located in Natick, Massachusetts, for testing.

Natick provides testing and research and development into “next-generation” uniforms for the US military, with an aim to enhance the survivability and performance capability military personnel, in a cost-effective way, using environmentally friendly techniques. Under its “Green Initiative,” the US Department of Defense wants to use an FR-coated 50/50 nylon-cotton (NYCO) fabric as the foundation material for garments across all branches of the US military, including its Extreme Cold Weather Combat System (ECWCS), the standard Army Combat Uniform (ACU), the Flame-Retardant Army Combat Uniform (FRACU) and the Marine Corps Combat Utility Uniform (MCCUU), along with similar programs in the Air Force and new programs for the Navy.

Alexium is the first company to provide an FR coating solution to the Pentagon that can allow low-cost, environmentally-friendly, durable 50/50 NYCO to displace vastly more expensive inherently FR fabrics in the four major military branches. In April, Alexium announced that based on the exceptional performance of Alexium-treated fabrics submitted to Natick, it had been selected to move to the second stage of the development process for the new FR uniforms.

In May, Alexium reported successful commercial-run trials of its FR solutions with a US military supplier of advanced textiles that combine exotic materials (including lycra, neoprene and natural rubber) for specific defence applications.

In June, Alexium received a purchase order from US firm Greenwood Mills, which makes fabrics for the US military, protective clothing and specialty industrial markets. The initial delivery to Greenwood Mills is expected to be followed by ongoing deliveries, from this current quarter. The same month, an order came in from a European maker of high-quality textiles for the luxury car sector, for FR formulations for its products, as well as an order from a major US-based bedding maker for the same. This order was extended into a full-scale production order earlier this month.

All of this progress would have been encouraging enough, but also this month, Alexium signed a potential landmark deal, to supply FR chemistry to a major US military supplier, Murdock Webbing. The Rhode Island-based Murdock Webbing is the sole supplier of strapping to US military, as well as other rigid and stretch webbing for straps in various applications including high speed racing vehicles and building industry harnesses. Under the deal Alexium’s fire-retardant chemistry formulations will be added to Murdock Webbing’s FR webbing product lines. In effect Alexium becomes a sub-contractor to the US military, and moves closer to a potential $250 million deal with the Pentagon.

The first Alexium FR sales will go into the FR Stretch Webbing market segment, for use in flexible straps for goggles. The company expects Murdock Webbing to expand the use of Alexium’s formulations into the much larger FR Rigid Webbing market, including military applications for backpacks, parachutes, field vests, duffle bags, uniform accessories, belts and tents.

The Murdock Webbing deal is seen as validating Alexium’s proprietary, environmentally friendly, non-toxic fire retardant solution. Later this month, the US Senate will vote on a proposed ban of bromine-based FR chemistry, the major process currently used to make fire retardants. Use of halogens is following bromine out the back door: these have already been banned in Europe. Bromine has been called the “new asbestos” because of its bio-accumulation and carcinogenic qualities: Alexium is in the box seat to benefit from the transition away from bromines and halogens.

There are other competitor treatments that are halogen and bromine-free, but they can only apply their FR treatment to a small range of textiles, while Alexium’s range of six chemical treatment products – known as Ascalon, Nycolon, Nuvalon, Polytron, Omnitron and Bactron – can treat a universal range of textiles and blends. (The company’s other patented products are Alexiflam and Cleanshell CB, which repels sarin and mustard nerve gas as well as biological threats.)

Alexium announced a 59% rise in revenue in the year ended 30 June 2015, to $415,000, but recorded a loss of $11.8 million. What investors want to know is when 2015’s good marketing work – which has greatly diversified the customer (and potential customer) base – will bring profitability? The markets that Alexium is addressing are potentially very large: up to US$10 billion in FR solutions alone. Brokers that follow Alexium expect the company to break through into profitability in FY16, on the basis of what could be a massive surge in revenue: Foster Stockbroking (of which Alexium is a corporate client) thinks it could go as high as $55 million. Foster reckons net profit could come in at $17 million in FY16, before rising to $30 million in FY17.

That would go a long way toward justifying the faith shown by the stock market. Alexium listed on the Australian Securities Exchange (ASX) in March 2010, through the shell of winemaker Evans & Tate, ETW Corporation (which had sold the Evans & Tate wine business to the McWilliam family in 2007.) ETW raised $4.5 million and bought the Alexium business, which owned the global rights to the Reactive Surface Technology (RST) platform technology, a process used to treat clothing and other textiles so the material is protected from biological and chemical attack, including anthrax spores.

Alexium has since swelled to a market capitalisation of $250 million, having earned shareholders 37% a year worth of capital growth over five years. The stock is up five-fold in the last 12 months, and that is after shedding more than 9% in the August correction, to 92.5 cents. On Foster Stockbroking’s earnings expectations, that prices Alexium on 13.2 times FY16 prospective earnings, and a staggeringly cheap 7.1 times FY17 earnings. Given ongoing contract wins and further progress out of Natick, that could make the current post-correction price seem very attractive in hindsight.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au